For many years insurance companies, such as Fireman’s Fund, has provided specialty coverages for constructing buildings in compliance with standards that make them more environmentally friendly; cost efficient; and self-sustaining. As the new construction standards have evolved and laws and regulations for building have emerged, the insurance forms have attempted to provide solutions of individuals who want to replace their structures according to green standards. In the new series of forms, the first modification that has occurred is that existing forms have been modified.

1. The Building and Personal Property Coverage Form CP 00 10 on page 2 modified the Property Not Covered.

(h) Land (including land on which the property is located) water, growing crops or lawns (other than laws which are part of a vegetated roof)

The following while outside the building

(q)fences, radio or television antennas (including satellite dishes) and their lead in wiring masts or towers, trees, shrubs or plants (other than trees, shrubs or plants which are “stock” or are part of a vegetated roof)

Outdoor Property

You may extend the insurance provided by this Coverage Form to apply to your outdoor fences, radio and television antennas (including satellite dishes) trees , shrubs and plants (other than trees shrubs or plants, which are stock or are part of a vegetated roof…… for specified causes of loss…..subject to limitation.

2. Cause of Loss Special Form CP 1030 on Page 6

Limitations

g. Lawns, trees shrubs or plants which are part of a vegetated roof, caused by or resulting from

(1) Dampness or dryness of atmosphere or of soil supporting the vegetation

(2)Changes in or extremes of Temperature

(3) Disease,

(4) Frost or Hail….

Those are the forms that took on some changes specifically related to Vegetated Roofs. In addition, the ISO has introduced a new endorsement for Green Upgrades. The endorsement, while available, is fairly complex and sets difficult guidelines as to how limits are to be set and payment for a loss would be determined. What follows is an overview of the endorsement.

The Green Upgrades Endorsement modifies the Replace Cost Valuation clause on the forms to which this endorsement can be attached which include: the Building and Personal Property Form; Business Income with and without Extra Expense; Condominium Association and Unit Owner Form and the Extra Expense Form.

Prior to the ISO introducing Green Coverage, several insurance companies have written this coverage for many years. Fireman’s Fund was one of the first companies to come out with comprehensive green coverage and the Equipment Breakdown coverage forms have included limited amounts of the coverage for years responding to environmental upgrades.

There are several reasons that the endorsement is in place and that the prior forms changed language responding to buildings that currently exist with green upgrades such as roofing surfaces for those individuals/companies who would choose to repair/replace their buildings following a loss with more resource efficient construction. This is still a fairly new concept to some and the endorsement will appear to be complex and confusing from both understanding the contract language; setting limit; and proving a loss.

When determining Replacement Cost for Green Upgrades the form will pay the additional costs to repair or replace damage property based on the materials and procedures set by the Green standard setter. The form states the following as relates the standard:

2) Green standards-setter means an organization or governmental agency which produces and maintains guideline related to Green products and practices. Green standards-setters include but are not limited to:

The Leadership in Energy and Environment Design (LEED®) program of the U. S. Green Building Council

ENERG STAR, a joint program of the U. S. Environmental Protection Agency and the U. S. Departement of Energy, and

Green Globes ™, a program of the Green Building Initiative

3) Green means enhanced energy efficiency or use of environmentally preferable sustainable materials, products or methods in design, construction, manufacture or operation, as recognized by a Green standard-setter.

The endorsement deals with green upgrades solely required for the purpose of satisfying the minimum requirements or recommended actions or standards of an ordinance or law by stating it will not disallow the cost of the Green Upgrade on the sole basis that such upgrade also falls under the provisions of the ordinance or law. The endorsement will not pay, as respects green upgrades, if that cost is paid under another form. I would caution anyone reading this language that it does appear more ambiguous then other sections of the new endorsement.

The first page of the form has a Schedule with seven columns:

Green Upgrades Maximum Amount

Premises

Bldg #

Building

Your Business Personal Property

Increased Cost of Loss %

Related Expenses

Number of Days for Extended Period of Restoration

Schedule indicates maximum amount available for Building and Personal Property

In the event of a loss the company will determine the amount payable by

Determine amount of direct physical loss prior to deductible

Multiply the amount determined by the appropriate increased cost of loss percentage shown in the schedule

Unless the loss is less than the deductible, the company will pay the least of the amounts for the total of all costs attributable to Green Upgrades

i. The actual cost of covered Green Upgrades

ii. The amount determined by applying the percentage

iii. The applicable amount show in the green upgrades in the schedule

Based on the aforementioned there are several steps the insured must take in first setting a limit which are difficult to quantify, at best.

Determine a “maximum” limit remembering that settlement will go back to the Green standards-setter. This limit must be determined for each building and building amount/personal property amount

Select percentage under the increased cost of loss column for each item. The percentages do not appear in the form; however, other reference material refers to the percentages available as 10; 20; 30; 40; or 50%.

The next column is “Related Expenses” which the form lists as:

Waste Reduction and Recycling

Design and Engineering Professionals Fees

Certification Fees and Related Equipment Testing

Building Air-out and Related Air Testing

The last column, for which a limit could be selected, is titled “Number of Days for Extended Period of Indemnity”. This column relates back to Business Income with or without Extra Expense and Extra Expense. This extends the “period of restoration” to include the increased period of time to bring the building up to the green standard.

In conclusion, the issue of “green” is a major driver in the new form series. It is important to talk with your clients about the desire to modify construction following a loss in compliance with green standards BEFORE the loss occurs.

A complete review of the Commercial Property Forms was presented on 1/29/13 and the archived webinar is available to all university members.

There is a saying that has been loosely attributed to Otto von Bismarck that says: “laws are like sausages; it is better not to see them being made”. This saying is probably insulting to the sausage industry but spot on when it comes to insurance reform laws. The point of this saying, regardless of who came up with it, is that while the legislative process can be messy, lengthy and involve many different parties and their opinions, the result should be a well-written law that benefits society. SB 863 certainly took a long time to come to fruition and is certainly lengthy. California residents, including the insurance industry, can only hope that the result is beneficial. The question is for whom: to the injured worker; the employer; the insurance company or the attorney? It is unlikely that it will be beneficial for all parties concerned, but perhaps that is too pessimistic. While this is a California law, it will be important not only to California broker/agents but for everyone who writes Workers’ Compensation for risks in California.

Now, before getting into the specifics of this new law, I need to tell you that I have spent the past several weeks reading this law (a nice bottle of Zinfandel may have helped) as well as countless articles, opinion letters, and blogs. Most of the articles provided an overview with very few specifics about the reform. So, here’s my warning before you read further: This is a serious article and one I have tried to include all the necessary detail we will need to work with the reform as it stands at this point. We are also conducting a seminar on the topic through the community on February 13th. Space will be limited for this very important topic. Here are the facts:

SB 863 was signed into law by Governor Brown on September 18, 2012 to take effect January 1, 2013.

This law was finalized after months of negotiations among representatives of labor unions and several large self-insured employers to create significant reform desperately needed in the California Workers’ Compensation system.

This is the first workers’ compensation regulatory reform in California since the passage of SB 899 in 2004.

Oversight and implementation of the revisions will be handled by the California Department of Industrial Relations and the Division of Worker’s Compensation.

Because the costs of the foregoing have been significantly increasing, employees and employers agreed that in order for benefits to be increased costs would have to be decreased and the process involved with the workers compensation system must be streamlined. In the past two years, the costs of workers’ compensation insurance have raised from $14.8 billion to $19 billion with a projected 12.6% increase above that in the coming months, prior this reform being enacted. Some of the changes that this law requires are fairly straightforward and involve specific dollar amounts for benefits as well as calculations for disability ratings. Some of the other changes are not as black-and-white so we will discuss the intent along with the specifics in those areas.

PERMANENT DISABILITY

Minimum and maximum weekly benefit amounts will be phased in over the next two years. At the end of that time, the maximum benefit will be $290 / week.

The permanent disability rating calculations have also been changed. Prior to January 1, 2013, the rating formula used modifiers that range between 1.1 and one 1.4 depending on the injury. The modifier is used to take into account the injured workers diminished future earning capacity as a result of the injury. The rating formula will no longer include the future earning capacity modifier. All injuries that occur on or after January 1, 2013 will be adjusted by a factor of 1.4. The rating system also uses the injured workers age and occupation as modifiers. Those modifiers will continue to be used. Injuries that took place prior to January 1, 2013 will continue to be calculated at the same modifier that was initially used.

Section 4662 of the Labor Code provides specific circumstances under which the injury is soon to be total disability: (1) loss of both eyes or site (2) loss of both hands or use (3) effective total paralysis (4) brain injury resulting in incurable mental incapacity or insanity. All other cases are decided in accordance with the facts of the injury. This section of the Labor Code has not been changed.

Previously, permanent disability awards were available due to sleep disorders or sexual dysfunction resulting from physical injuries. These circumstances will no longer qualify for permanent disability awards. Psychiatric injuries resulting from physical injuries will no longer qualify for permanent disability unless the injured worker with either the victim of a violent crime or witnessed a violent crime.

Psychiatric claims involving treatment for sleep problems, sexual dysfunction and or psychological consequences of their injuries will still be compensable under the new law.

The combination of the increase in benefits and the methods used to calculate permanent disability ratings results in approximately $850 million in additional benefits for permanently disabled workers.

JOB DISPLACEMENT VOUCHERS

An injured worker has been eligible to receive this job displacement voucher that could be used to pay for job retraining. The amount of this voucher was based upon the permanent disability rating and was on a sliding scale that ranged between $4,000 and $ 10,000. In order to be eligible for this retraining voucher the permanent disability rating had to be fully determined either by a ruling by the Workers’ Compensation Appeals Board or by a settlement agreement between the injured worker and the employer.

The voucher amount is now fixed at $6,000 when the injured worker reaches permanent and stationary status and the treating physician reports on the injured workers abilities and limitations resulting from the injury.

RETURN TO WORK FUND

The Department Of Industrial Relations is responsible for establishing and administering a $120 million asked per year Return to Work Fund. The reason that this new fund is being established is to take care of the worker when their disability is disproportionately low compared to their earnings. The new Labor Code Section 139.48 says:

139.48. There shall be in the department a return-to-work program administered by the director, funded by one hundred twenty million dollars ($120,000,000) annually derived from non-General Funds of the Workers’ Compensation Administration Revolving Fund, Eligibility for payments and the amount of payments shall be determined by regulations adopted by the director, based on findings from studies conducted by the director in consultation with the Commission on Health and Safety and Workers’ Compensation. Determinations of the director shall be subject to review at the trial level of the appeals board upon the same grounds as prescribed for petitions for reconsideration.

The term director in this law refers to the director of the DIR. Where will the money come from? It will be 100% funded by surcharges on the Workers’ Compensation policies purchased by California employers. The payment of benefits will not be paid by the insurance companies, but will be determined and administered by the DIR. Any appeal from a determination of benefit will be made to the Workers’ Compensation Appeals Board. A number of attorneys have opined that since the law specifically allows review at trial level, that it is implied their fees will be paid from the fund. There are no current regulations that expressly provide for those payments. The regulations to comply with this requirement have not yet been written, or at least published.

INDEPENDENT MEDICAL REVIEW

This portion of the new law is designed to create a significant change in resolving medical treatment disputes. As of January 1, 2013 for injuries occurring on or after that date and as of July 1, 2013 for all injury dates, an Independent Medical Review will be used to decide these types of disputes.

Currently it can often take 12 months to resolve a dispute and requires specific steps that must be taken. The process involves (1) negotiating the selection of a medical evaluator (2) obtaining a listing of state-certified medical evaluators (if an agreement is not reached) (3) negotiating over the selection of the state-certified medical evaluator (4) making the appointment (5) examination (6) obtaining the evaluator’s report (7) obtaining a hearing date with the judge if there is a disagreement on the evaluation (8) waiting for the judge’s decision. In addition, the treating physician can rebut a request clarity from the medical evaluator and the evaluator may be required to submit supplemental reports.

The law does proscribe the process for an injured worker to appeal an IMR determination and again, that will go to the trial level of the WCAB. The basis for the appeal is either fraud, conflict of interest or a mistake of fact. The IMR is only available if there is a dispute over the requested medical treatment. It is not available to resolve other types of dispute, such as the injury itself.

MEDICAL PROVIDER NETWORKS

Due to the prevalence of complaints involving MPNs, such as including doctors who do not accept workers compensation patients and the lack of availability of care and specialty areas the bill includes several modifications of the MPN system.

Removal of the current requirement that 25 percent of doctors within the Network practice in areas other than occupational medicine.

Physicians must affirmatively confirm participation in a network.

Each Network will have to provide medical access assistants who will help the injured worker find an appropriate doctor for treatment.

The Division of Workers’ Compensation must perform continuous and random reviews. The DWC has been provided the authority to impose penalties if the Network fails to properly address and correct access problems.

Disputes regarding whether or not an injured worker is subject to utilizing a Network will now be resolved at the time of the dispute, rather than holding resolution over until the end of a claim.

Treatment from a non-Network provider without authorization from the insurance company or a judge’s order will no longer be paid by the insurance company or the employer.

If the injured worker obtains treatment from an unauthorized provider that is either unsuccessful or worsens the injury, those medical costs will not be paid by the insurance company or the employer.

Medical reports submitted by a non-Network provider can no longer be the sole basis for a compensation award. These types of reports must be reviewed by the authorized physician and a qualified or agreed medical evaluator.

INDEPENDENT BILL REVIEW

This is a new process that is being established to resolved medical billing disputes. This portion of the law also contains new requirements for submitting a bill and how insurance companies or employers must communicate their payment decisions to the medical providers.

LIENS

This is one of the most significant modifications to the workers’ compensation system in California. A lien is a direct claim against the defendant typically submitted by medical providers or other service providers that the employer was required to provide. The medical provider uses a lien to contest the employer’s determination of the amount payable for the medical services.

This legal tool is relatively unique to California and has resulted in a significant number of liens to be filed through the court system. In 2010 there were approximately 350,000 liens filed and in 2011 approximately 450,000. The result of this is an expense incurred by insurance companies and employers alike of approximately $200,000,000 a year. Because of the sheer volume of filed liens the courts encouraged settlement of these liens and as a result many unjustifiable claims were paid.

The bill requires that a lien filing contain certain declarations made under penalty of perjury. The filer will also have to pay a filing fee of $150.00. All fees collected will be deposited into the Workers’ Compensation Administration Revolving Fund. There are also provisions for dismissal of liens after January 1, 2014 as well as a statute of limitations (18 months) for filing liens for services rendered after July 1, 2013. Another statute of limitations (3 years) applies for services provided prior to that date.

The bill also requires the employer to pay for interpreter services.

The specific language in the bill relative to the subject of liens is contained in many, many pages of the bill. Undoubtedly the wording and intent will be clarified over the course of the next several years as to the legislative intent and the various loopholes will be found by the courts, whether favorable to the employer, the injured worker or the service provider.

A schedule of maximum service provider fees are to be developed and implemented. The Official Medical Fee Schedule will be updated and will incorporate Medicare’s Resource Based Relative Value Scale.

SELF-INSURED EMPLOYERS

Required to pay deposits to ensure that their responsibilities to pay losses will be to be issued by December 31stannually.

The bill also precludes Professional Employer Organizations (PEOs), temporary employment agencies and employee leasing organizations from being a self-insured employer. The bill also tightens the restrictions that could allow an illegally uninsured employer from claiming self-insured status. The employer must receive approval from the Self-Insurers’ Security Fund.

Self-insured public entities’ annual reporting requirements have also been strengthened and a required study of the self-insured public entity programs must be performed by the Commission on Health and Safety and Workers’ Compensationand a report completed with preliminary recommendation for improvement of the program by October 1, 2013.

As a conclusion to this lengthy article, this law has been touted by many different groups as a streamlining, cost-saving reform that will also include significant increase in benefits, particularly for those persons deemed permanently disabled. The funding of the increase in benefits is supposed to be funded by the streamlining of the compensation claim process and the other procedures identified above. Well, there is no doubt that the scope of this reform bill will have significant impact on the entire workers’ compensation system in California for years to come. One can hope that the employers will actually see cost-savings relief and that those seriously injured workers get the help they deserve. There is little doubt that the legal jousting will begin and continue for some time. Thanks to all of you who have actually reached the end of this article and hope to see you in class on February 13th.Sign up on site at www.insurancecommunitycenter.com

We like to stump you here at the Insurance Community Center and what better opportunity than Halloween.

Halloween has always been one of my favorite holidays—no pressure with gift giving and usually no hangover the next day. It is not our goal to ruin every holiday for all of you by putting the “insurance spin” to the festivities, but rather to make you aware of the real exposures attached to these celebrations so you, or your customers, are not blind sighted by a lawsuit.

Halloween is a much bigger holiday than most of us might have realized. According to consumer studies, behind Christmas, Americans spend more money on Halloween than any other holiday. Halloween adds more than $10 billion dollars annually to the gross domestic product. On the insurance side of this issue, there are more pedestrian car accidents on Halloween night than any other time during the year. There is always the concern with the crazies that purportedly try to injure the trick-or-treaters with tainted or dangerous treats.

The festive Halloween mood has long been a time of celebration in offices, insurance agencies included. It marks the beginning of the holiday season. It is estimated that over 1/3 of employer’s offer Halloween celebrations at work. From a workplace standpoint, celebrating Halloween has been a benefit in team building; reducing stress and tension and nurturing creativity. Those are all the positive aspects of the office Halloween celebration and certainly the way I fondly remember those parties in the good old days.

But the mood has changed and with that change comes the reality of employee discontent. I was surprised to read so many articles about EPLI claims and the office Halloween parties—who would have thought? Employment Practices Liability has been available for decades and we all should be well aware of the importance of offering Employment Practices Liability (EPLI) to all of business insurance clients. We are accustomed to thinking about EPLI as relates sexual harassment; wrongful termination; discrimination and now the wage and hour allegations. So how does Halloween fit into this group of coverages. In an article titled “Imprudent Halloween Policies Can Be the Nail in the Coffin to FLSA and Title VII Compliance” there is a discussion on the two federal laws relate to employment practices and celebrating Halloween. http://hr.complianceexpert.com/news/imprudent-halloween-policies-can-be-the-nail-in-the-coffin-to-flsa-and-title-vii-compliance-1.93995?qr=1

Before considering putting on a Halloween celebrations , remember to consider all the issues related to inappropriate dress, unsuitable behavior, religious beliefs, employee safety, as well as the company image. Then also make sure you have the proper employment practices liability insurance (EPLI) coverages, to guard against any claims. There was an excellent article written by Keven Moore titled Halloween Celebration in the Workplace can be Risky on 10/16/12 that discusses many of the issues we are highlighting in this article that can be accessed at : http://www.kyforward.com/2012/10/keven-moore-on-insurance-halloween-celebration-in-the-workplace-can-be-risky/

Here are some broad categories that cause issue with the celebration in the workplace:

Religious:
There have always been questions to whether Halloween is a Christian, Pagan, or Secular holiday and therein lays the problem. There seems to be agreement that Halloween evolved out of a Catholic holiday called All Hallows Eve which occurs the day before All Saints Day, a general celebration of the saints on November 1. The obvious problem with celebrating this holiday in the office is if it offends anyone’s religious beliefs and forces them into an environment of celebrating a holiday they either do not believe in or are opposed to celebrating. Certainly this same claim could be made for Christmas, as well.

Inappropriate Costume:
It is very difficult to control what employees may consider to be an appropriate costume. In an effort to maintain a professional and discrimination-free workplace, there must be “rules” that govern what the employees can wear. In any office there is always an employee or two who will push the boundaries to the point of violating the company’s dress code and may even be politically incorrect for the office environment. In this year of a presidential election, we have to be overly cautious not to violate an individual’s rights to their own political views and discriminate in any way by making remarks OR appearances that would offend them.

Harassment:
Face it, not everyone has a sense of humor. Some employees may see Halloween as an opportunity to engage in practical jokes, or send and receive emails with menacing, threatening or explicit content. Most companies have email and/or Internet policies that explicitly preclude this practice and Halloween should be no exception to the policies. What appears to all be in good fun—may not be funny!

Workplace Violence:
It is hard to believe that his could be a concern in the Halloween office party; however in the society that we live in today, employers must set limits on masks and costumes and prohibit toy or real weapons as costume props.

Diversity:Do not pressure employees to participate. If an employee advises you that he or she wishes to abstain from the Halloween celebration, respect that decision.

Safety Guidelines:
Each workplace has its own set of unique risk exposures and hazards and employers must be cautious of the safety hazards that clothing from costumes around any moving parts or machinery may cause injury. Or Masks that might obscure an employee’s field of vision which could prove to be hazardous. Costumes not flame resistant should be prohibited in certain work settings with ignition sources. Employees should be reminded that safety rules must be observed at all times and that any costume that could create a hazard is not permitted. If children are allowed to attend the office Halloween party it is important to create a safe environment and assess what potential safety exposures there are to the children.

Alcohol Consumption:
As with any office party or celebration, alcohol consumption can also be a significant safety and liability concern. In terms of EPLI, we all know that too much alcohol can lead a variety of inappropriate types of behavior.

This article comes AFTER the holiday has ended this year so hopefully you got through the celebration unscathed. As we approach this holiday season, we have to be mindful of the diversity in our offices and avoid any potential violation of our employees’ rights and privacy. This is a message we should be sharing with our clients, as well. The community wishes all of you a fun and safe holiday season.

Join us to learn Crop Basics; Crop reforms; New Crop Programs and Crop lessons learned from Hurricane Sandy. CE Credit is available in many states.

Tomorrow, November 28th, The Insurance Community Center will be presenting a two hour Crop Insurance Class that qualifies for CE in some states. The presenter for the Crop class will be Rita McMullan AFIS, CPCU, CPIW, AAI , President, PDM Insurance Agency.

This class is open to all University members at no cost and can be attended by non-members for a fee of $50.00. You can sign up for the class at insert direct link to sign up, please.

The year 2012 has been tough on farmers due to the severe drought that affected much of the U. S. Add to that Hurricane Sandy that wreaked havoc along the East Coast further threatening farms and ranches. While early estimates project Sandy to have caused about $30 billion in property damages and another $10 billion to $30 billion in lost business, the overall impact on agriculture fortunately may be less dire.

The good news for the farmers is that the growing season was essentially complete on much of the East Coast and many farmers sped up harvesting ahead of Sandy, the overall picture isn’t so much black as it is grey. But, that’s not to underestimate localized crop damage that is severe in places. Examples of loss include:

Loss to production and growing crop

Livestock Death Losses

Feed Purchases if supplies or grazing pastures are destroyed

Extraordinary Costs due to lost supplies

Extra transportation costs to transport livestock to safer grounds or to move animals to new pastures

The “Courts” view of Under Insurance CasesThe Good, the Bad and the Ugly!

The Good…..

We are going to start with the good which is hard to find in cases of “under-insurance”. The good news is that California, at least, has learned its lesson after years of massive fires; earthquakes; and, we can’t forget, riots. Whether natural disasters or man-made we have seen our share of CAT losses and learned firsthand what underinsurance; incorrect insurance or failure to place coverage, at all means when a major loss occurs.

So, what is the good news? The good news is that last year, the California Department of Insurancepassed and enforced new regulations that require all insurance agent/brokers that write residential insurance to take a class specifically in residential valuation and comply with new regulations for estimators and record maintenance. This regulation was made as a direct result of a demand made against the California Department of Insurance by the claim ravaged insureds of the San Diego fires to go after the culprits—the insurance

representatives—who sold (or didn’t sell) the correct coverage. This is good news because now the agents have the tools to use for estimators and a better understanding of the legal requirements.

This is clearly NOT a California problem only. As I write this article, my TV is updating the status of Hurricane Isaac. It was only a month ago that Colorado was hit by wildfires where insurers expect to pay out nearly $450 million to victims of the Waldo Canyon and High Park fires according to the Rocky Mountain Insurance Information Association. Whether it is a single property loss or one classified as a CAT loss, the insurance industry faces the question of whether the insurance written was adequate from both a coverage and limit perspective. The majority of these claims come from homeowners who have lost their homes.

The Bad…..

The “bad news” is that no matter how well we try to write the residential coverage to value, it is a guessing game at best. Let’s begin with the basics: how do we decide what limit to write for a homeowner? Here are a couple of the methods or a combination of approaches:

1. An escrow company or bank demands that a certain limit be written to cover the loan on the policy
2. An insured may request a limit of insurance to cover the amount they paid for the home
3. An insured might request the same limit that the prior homeowner had on their policy
4. The agent or representative may base the amount on the issuing insurance company’s worksheet. What we have all experienced is that there can be a significant difference from one company to another as to the amount of insurance that is being required. What do we do then?
5. The agent or representative may base the amount may provide a secondary cost estimator based on other resources such as Marshall & Swift which provides yet another amount for the home insurance
6. The agent or representative may personally go out and inspect the property and do an on sight estimator. The reality is that most individuals in the insurance industry have minimal knowledge of what goes in to a home inspection
7. On rare occasions there is a formal appraisal performed for insurance purposes—again another number then the one we calculated with the insurance company’s estimator
8. And we cannot forget the plea from our insured to write the very lowest amount possible so they can save money. Trust me they will not remember that discussion when the house burns to the ground.

Regardless of how we determine the values, all methods have one common element which is that amount of insurance is probably too low to handle a total loss that involves all the unknown costs we never took into consideration. This coverage deficiency is especially true in a loss that involves more than just a single home, such as in the wildfires or hurricanes, where the cost of reconstruction skyrockets with the escalated cost of labor and shortage of materials. To make these matters worse, the other coverages provided in the Homeowners Policy are percentages of the limit that was set on the Dwelling—if that amount was underinsured then the other limits may prove inadequate, as well.

The good and the bad……

The insurance industry solution to the chronic problem of underinsurance in residential property was twofold: Guaranteed Replacement Cost or Extended Replacement Cost.

• Guaranteed was basically a limitless policy for the Dwelling—“guaranteeing”, as the title suggests “full replacement cost”. But that form fell short of “full replacement cost” or any guarantee. We learned that the hard way in the aftermath of San Jose, California fires when we first “learned” that “guaranteed” did not mean the policy guaranteed to pick up the cost of all the new ordinance or laws in affect at the time of loss. This left the insureds without funds to bring their homes up to the building code requirements mandated for replacement.
• The use of “Guaranteed Replacement Cost” on residential is not readily available by most carriers. Even if the companies are saying they are writing “Guaranteed Replacement Cost”, they are most probably issuing an Extended Replacement Cost Endorsement referred to as ERC. ERC extends the coverage over and above the policy limit by a percentage indicated in the policy. Typically 25% is the minimum increase. The Extended Replacement Cost does NOT include Building Ordinance which must be written for a separate amount of insurance typically by endorsement.

The Ugly….

You are sued. Short and simple, the claim did not go well and your client has decided to sue you and anyone else they can name in the lawsuit. Discovery now begins often times going back years and years when you first wrote the coverage. You will answer such questions as:

1. Who set the limit of insurance initially (very possibly does not even work for you anymore)
2. Who else was involved in setting limit during the term of the policy (we are talking everyone who touched that file AND the producer(s) who spoke with the insured.
3. Was the insurance reviewed annually and a new estimator completed and reviewed?
4. Is there a clear documentation trail? We are talking not just the old fashion hard copies but all the laws regulating electronic discovery.
5. Did the insured ever receive any of the estimates in writing? This is now required by law in California but best practices was that we always provided our insureds this information
6. Did the insured acknowledge receipt of the estimator and verify in writing that the amount was acceptable?

The reality is that, in most cases, insureds rely on their insurance agent/broker to set the policy limit and to make sure they are “fully” covered. However, the general rule is that an insured is responsible for the establishment of the policy limit. Case law in California has, historically, been kind to the insurance agent or broker in finding that they do not have the “duty” to suggest or volunteer that an insured should purchase higher limits or additional coverages. (Fitzpatrick v. Hayes, (1997) 57. Cal.App.4 916. So far this sounds like good news but it is about to get “Ugly”

There are important cases that were decided before Fitzpatrick v. Hayes that weighs heavily on the obligation of the insurance agent/broker in setting limit. One of the most important was Jones v. Grewe (1987) 89Cal.App.3rd 950. This case involved third party liability and the court held that an insurance agent could NOT be held liable for failing to obtain sufficient limits on a third-party liability policy. The Jones case held that an agent could not reasonably forecast the upper limit of liability that an insured might need. The case went on to reason that if liability were extended to agents for not obtaining sufficient liability limits that it would amount to an insurance agent being put in the position of an excess insurer. It is important to remember that this case dealt with liability and not setting limits on property.

In 1992, the Jones decision was followed by Free v. Republic Ins. Co (1992) Cal.App.4th 1726. This case involved a homeowner who specifically asked his broker whether his policy limits were sufficient to cover his home for a total fire loss. The broker affirmed that he was “fully insured to value”. The insured sustained a loss for which he did not have adequate limit and sued his broker. The broker was held liable. In the Free v. Republic case, the court made a distinction about “misrepresentation” in setting limits on a first party (property coverage) as opposed to a third party (liability coverage) as held in Jones v. Grewe. The court reasoned that a broker/agent can objectively determine the amount of replacement cost value for a dwelling in the event of a total loss which is not the case of the subjectivity concerns in a third party policy.

In 1996 the court ruled in Desai v. Farmers Ins. Exchange, (1996) a47 Cal.App.4th 1110. In this case the insured requested that his agent provide him with “100% coverage” for his home in the event of a total loss. The insured issued a policy for $150,000 which included earthquake and there was no Guaranteed Replacement Cost provision. The insured suffered damage in the Northridge Earthquake with a cost to repair the home at $546,757. The court held on appeal that the agent negligently represented that the policy provided 100% replacement cost and that the language in the policy representations found in areas such as the “value protection” clause and inflation protection that gave more credence to the assertion the insured was fully covered. .

Back now to Fitzpatrick v. Hayes. (a997) 57 Cal.App.4th 916, which was referenced in the beginning of this article. The Fitzpatrick case had the precedent cases of Jones, Free and Desai to rely on its opinion. The Fitzpatrick case set the three recognized exceptions, under California law, to the general rule of whether agents and brokers could be held liable for under insurance. The general proposition is that an insurance agent does not have a duty to volunteer to an insured the need to procure additional or different insurance coverage UNLESS one of the three following situations occurs:

1. The agent misrepresents the nature, extent or scope of the coverage being offered or provided;
2. There is a request or inquiry by the insured for a particular type or extent of coverage; or
3. The agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.

In looking through these criterion, and understanding that only one has to apply for an agent to be held liable, it is easy to see how an agent could fall in the trap. The questions would be:

1. Did the agent represent to the insured that the limits were adequate
2. Did the insured specifically ask the agent if they had adequate coverage; full coverage; 100% coverage or any other qualifier of this type.

We spoke earlier of the practice and requirement that agents use insurance company’s estimators to arrive at a minimum amount of insurance to be offered the insured. As we go through this process with our insured, it clearly gives them a false sense of security that we know what we are doing. It is an understatement that we have to be cautious as to how we communicate the estimator’s figures—emphasizing this is an “estimator” and this is an “estimate” only NOT an appraisal of property. What the Fitzpatrick case cautions us is that if the insured requests full coverage or questions the agent to affirm that the coverage is adequate, and we say “yes” that the agent will fall within one of the Fitzpatrick exceptions. There are, of course, situations where an insured never spoke with their agent about the policy limits. This may not get us off the hook, however. This lack of communication may be because the insured has relied on the insurance agent’s expertise in the area of estimating the value and did not feel they had to get any further involved. Even though the agent may not have had any oral or written communication concerning values; courts will check to see if there is any advertising, such as on a website, or other promotional materials that would portray the agent as “holding himself out” as being an expert. The reality is that the very first thing we do, as expert witnesses, is check out the agent’s website to read the representations that are being made.

The cases cited in this article are from California; however, every state has their own case law as relates to an agent or brokers responsibility for underinsurance. The legal issues we discussed here will be the same issues that each of the cases of underinsurance will contain. I believe that other states will follow the requirement set by the Department of Insurance to mandate education and regulate how records are to be maintained.

The Good, the Bad and the Ugly was a lot funnier when viewed as the movie about a bounty hunting scam to find a fortune in gold buried in a remote cemetery. (stared Clint Eastwood, Eli Wallach and Lee Van Cleef in 1966). Unfortunately, there is no humor in a court of law regardless of what state you are from.

The first time anyone heard of a “continuous trigger” decision was back in 1995 when the California Supreme Court issued its ruling in the Montrose case. This created a watershed moment for underwriters, claims adjusters, agents and insurance buyers alike. The result of this decision was the insertion of “known loss or damage” language into the insuring agreement of the General Liability policy, first by an endorsement in 1997 and subsequently included the next published ISO edition. There is a new decision by the California Supreme Court that will have an impact on the method of claim payments for continuous or repeated injury or damage. Clearly this is significant for construction defect and some products liability claims. Although these decisions are California jurisdiction, anytime there is a significant court decision anywhere in the country, form revisions and exclusions often follow. In order to discuss the latest decision, State of California v. Continental Insurance Company, it is appropriate to go back to that original decision and others that followed to have a contextual understanding of how these decisions have cumulatively affected coverage and claims and will continue to do so for quite some time.

Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655
Montrose was named as a Potentially Responsible Party in the EPA’s mandated clean-up of the Stringfellow Superfund Site in Riverside County, CA. When this PRP notification was received by Montrose, they notified their Environmental Impairment Liability carrier but not their General Liability carrier, Admiral. When litigation subsequently commenced against Montrose, not only by the Federal government for environmental damage, but other injury and damage claims by individual litigants, Montrose then turned to their insurance carrier, Admiral Insurance Company for defense. Admiral declined, stating that the manifestation of these losses occurred upon notification of the PRP status, which occurred during a time that Admiral was not Montrose’ insurance carrier. At that time, adjusters were using a “manifestation” trigger of a single liability policy to pay ongoing injury or damage claims. The judicial review of the policy obligations to defend an insured took almost a decade to complete. The 1995 decision by the California Supreme Court provided a strict interpretation of the policy language regarding the policies that are required to defend. The Montrose court applied a “continuous” trigger for continuous or progressively deteriorating injury or damage. This means that all insurers, beginning at the point a reasonable person believes that the injury or damage first began, all insurers during the subsequent injury or damage period and concluding when legal liability has been imposed.

To use a simple illustrative example: A water pipe is damaged during construction and over the next 6 years the property sustains water damage. It is first noticed by the property owner in 2010. Under the old claims guidelines, the 2010 policy was triggered. Under the “continuous” trigger, all of the policies from 2006 through 2010 are triggered. If the damage continues past 2010, all insurers will continue to be triggered until legal liability has been imposed.

This ruling left several coverage questions unaddressed:

1. Does this decision apply to damages?
2. Can the insured stack their limits of insurance over the entire continuous time period?
3. What happens if the insured has a time period for which they are not insured during the continuous injury or damage period?
4. How does this decision affect allocation of defense and damages among the various insurers on any given loss?
5. If the insured has both primary liability coverage as well as excess liability coverage, how does each policy respond?

Each of these questions have been subsequently addressed by either California Appellate Courts or by the California Supreme Court.

Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., supra, (1st Dist., Div. 1, 1996) 45 Cal.App.4th 1, 55-57, 52 Cal.Rptr.2d 690
This ruling held that insurers on the risk must pay the insured 100% of the insured’s liability to third parties even though the insured was uninsured or self-insured for a portion of the time during which “occurrences” were occurring.

Stonewall Ins. Co. v. City of Palos Verdes Estates, (1996) 46 Cal. App. 4th 1810
The Stonewall case deals with a couple of the issues raised above. This case involved a property owner, Papworth, who filed litigation against the City for the ultimate condemnation of his property due to actions of the City over a significant timer period, beginning somewhere around 1971 and continuing until the home’s effective destruction in 1980. The jury awarded Papworth $1,188,791.57 as damages for negligence and nuisance and $1,881,946.70 as damages for inverse condemnation. Judgment was entered for $1,881,946.70. Pending appeal, the underlying action was settled by payment of $1,600,000. Of the $1,600,000 settlement, $350,000 was paid by the City, $300,000 by The Jefferson Insurance Company of New York (“Jefferson”) and $950,000 by Stonewall Insurance Company (“Stonewall”). Other insurers of the City refused to contribute toward the settlement.

The court addressed the following questions:
Question 1: How much of a judgment is the City entitled to recover from each primary insurer?
Question 2: In what proportions are the primary carriers to share in whatever payments any of them made or makes toward the $1.6 million loss?

The Stonewall court concluded: “We find the answer to Question 1 in Montrose ‘s analysis: All primary carriers on the risk are liable to the City (up to the limits of their respective policies, less any applicable deductibles or retentions) for the full $350,000. Inherent in Montrose ‘s conclusion that in cases involving a “continuing injury” trigger of coverage is the principle that damage was occurring throughout the period in question and that all carriers issuing primary policies for dates within that period are fully liable to the insured for the entire loss. Once an injury triggers coverage, … the insurer must indemnify the insured for “all sums” which the insured becomes obligated to pay, whether during the period of the policy issued by that insurer or after.”

Question 2 involves allocation among the primary carriers during the time of the risk. The Stonewall court resolved this question by stating that “because we must consider both principles of equity and principles of public policy, formulating a principle of allocation is no easy task. Equity indicates that all insurers whose policies covered the loss should participate in the cost of indemnifying the insured.” …”Apportionment based upon the relative duration of each primary policy as compared with the overall period during which the “occurrences” “occurred” (the “time on the risk” method).” In this case, the court recognized that there may need to be exceptions to this allocation method and did not make it a mandatory rule to follow in future cases. The court addressed the “other insurance” clause that may appear in the policies in question. If that clause allows for a pro-rate allocation method, then that would dictate apportionment. The court also applied a “horizontal” exhaustion rule, which stated that all of the primary policies would respond, and only after the total exhaustion of the primary policies limits, could the excess liability policies be required to respond. The Stonewall decision also concluded that since the insured is entitled to payment of damages up to the limit of liability, any self-insured (or lack of insurance) is not calculated into this qualified time on the loss.

State of California v. Continental Insurance Company, et al., Case No. S170560
On August 9, 2012, the California Supreme Court issued a long-awaited unanimous decision, affirming that a policyholder is allowed to recover up to the total limits of all triggered policies over multiple policy years and may stack limits across the triggered policy periods.
For the background, we go right back to the Stringfellow Superfund Site. The State of California was held liable for remediation costs (as high as $700 million) and sought to recover from its various liability insurers.

The Supreme Court has now ruled on each of the following points:
• Each insurer during the continuous loss has an obligation to pay the entire claim, even if only part of the damages occur during their specific policy period (“all sums”). The Supreme Court affirmed that once coverage for continuous damage is triggered, the insurer is required to pay for all sums up to the policy limits of liability. It rejected a pro-rata, time-on-the-risk approach. The Supreme Court noted that “It is often ‘virtually impossible’ for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case. If such evidence were required, an insured who had procured insurance coverage for each year during which a long-tail injury occurred likely would be unable to recover.”
• The insured can stack policy limits across the various policy periods, even when coverage is issued by the same insurance company. The Supreme Court affirmed the Court of Appeal’s ruling that a “no-stacking ruling” was erroneous and concluded that the insured was entitled to stack the limits of all triggered policies across all applicable policy periods.
• The court stated that an insurer can limit their exposure by including an anti-stacking provision in their policies
• If the policy contains a self-insured retention, then that SIR must be paid for each policy period

The Supreme Court reasoned that its “all-sums-with-stacking” rule has several advantages:
• It resolves, as equitably as possible, the question of insurance coverage in long-tail injury or damage
• It allows a fair distribution of coverage, paid in annualized premiums by the insured, and allows the insured to receive coverage up to each policy’s liability limits
• It allows recovery from the insurance policies by looking at the entire amount of damages , rather than requiring it to be broken into artificial periods of injury or damage

So, here’s what we are left with:

Many insured’s face long-tail injury or damage losses. Each insurance company providing a policy can be held responsible to pay up to their policy limits but can charge the insured any retention on the policy. There has been a long-standing argument from insurance adjusters on this issue. There is one more case that I did not address above and that is the Armstrong decision that allows the insured to “select” a particular policy to defend and pay damages. Should the insured tender to one carrier for defense and damages and notice only the other possible insurers? In light of this decision, that choice may be moot as it appears that the court will allow the insurers to distribute the claim proportionately, even among their own multiple policy periods. Watch how fast the adjusters use this decision to apply multiple deductibles and multiple retentions, even if notice was tendered to only one policy period.
We are likely going to see “clarification” in the insuring agreement regarding the issue of “all sums for which the

insured is legally liable”. The current policies do not use this phrase and instead state: We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.

There may well be challenges at some future point on this distinction. Stay tuned.

The court left intact a horizontal application of insurance coverage, requiring the primary policies to contribute their full limits on a pro-rata allocation basis prior to attaching the excess liability policies. There is likely to be yet another long and costly battle among primary insurers vs. excess insurers on this issue.
In the absence of an anti-stacking endorsement, the insured is entitled to stack the policies. That is likely to be the next industry response: an anti-stacking provision that up until this decision, has been omitted from the vast majority of policies. All of these decisions should concern the insurance agent as well as the insurance buyer. From the insurance buyer’s perspective, they need to retain coverage information indefinitely. From the insurance agent’s perspective, filing claims on the insured’s behalf, explaining how a SIR may affect their coverage response as well as the applicability of limits of liability, just got a little more complicated.
Written by:
Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
President Segale Consulting Services, LLC

Where does that phrase come from, anyway? It appears that there is no definite answer to that question. One writer believed it came from an ancient Roman proverb and that the Romans believed that apples had magical powers to cure illnesses. Another source believes the phrase first appeared in a magazine published in Wales: Notes and Queries. The article referred to a Pembrokeshire proverb that read ‘Eat an apple on going to bed, and you’ll keep the doctor from earning his bread.”

Just when you thought you were making a healthy choice, U. S. A. Today reported on 8/10/12:

“Sliced apples distributed to fast-food and grocery chains nationwide are among packaged products being recalled due to possible listeria contamination. No illnesses have been reported, but listeria was found on equipment used to produce apple products by Missa Bay LLC, owned by Ready Pac Foods Inc. of Swedesboro, N.J. Packaged apple slices distributed to McDonald’s and Burger King in some states are included in the recall as are packaged food containing apples distributed to Wawa convenience store and Wegman’s grocery chains and some “Ready Pac” products. Recalled products have use-by dates of July 8 through Aug. 20. Missa Bay announced the voluntary recall on Friday, saying the food went to 36 states and the District of Columbia.

So, the salient point – who pays the cost for this? Wawa, Wegman’s or McDonald’s? Believe me, when you know the incredible costs of recalling a product, everyone is going to be running for the exit. Suddenly, the purchase orders are checked by all of the various parties. Knowledgeable retailers have distribution contracts with either the manufacturer directly or with the distributor. Because they often receive so many products, the issues of hold harmless agreements, including recall costs, often goes unaddressed. Ultimately, the original manufacturer will be held responsible, but if that has not been made clear between retailer, wholesaler and manufacturer, it could be happy times for the lawyers. The reason the manufacturer will be held responsible goes back to the implied warranty inherent in product liability: the product will be fit for its intended use. The courts view this obligation through the lens of strict liability, which requires no negligence to be proved. Res ipsa loquitor: the thing speaks for itself. If the product is received by the distributor from a non-U. S. company, the distributor will “step into the shoes” of the manufacturer.

So, what is involved in recall? First, the product, including unit or lot number must be identified at all retail locations. Next, the product must be removed from all consumer access. The product must then be returned to the responsible party for testing and then either distributed back to the marketplace or destroyed. Of course, this step also involves the cost of transportation and storage as well as the actual cost of destruction. Clearly this involves significant payroll expenses and can also result in loss of revenue for the entire stream of distribution. All of these costs and loss of income will be sent to the manufacturer for payment.
Notice that the question does not ask about insurance. That is because the majority of retailers, wholesalers and manufacturers do not have any coverage for these types of expenses and loss of product. The general liability policy does NOT respond for any of this. The only solution available is a Product Recall policy. Too bad that this coverage is not understood, translated to the client in a coverage offer with facts and costs included. Since this insurance coverage is not widely distributed, the premiums remain high. Creating a broadened marketplace, fostering competition and thereby driving down the cost of the insurance is driven by the sales of a product by producers. Historically there has been a lot of adverse selection in this area of insurance and that will continue to keep prices high for this insurance coverage. For any producer out there – this can be an area to have a serious discussion of risk exposure with your client. Review their contracts and find out if there is either a transfer of risk, acceptance of risk or if there is simply nothing in the contracts about this issue. Determine if your client is the position of reducing their risk of loss, transferring it to someone else, implementing loss control or funding the risk protection with insurance. Bear in mind, the bad press that results from this is challenging for everyone involved and can adversely affect the company for months or years to come. This is particularly true with food borne illness. For the food industry, the coverage for the extra expense of advertising as well as the resultant loss of income has an extremely narrow marketplace, but there is coverage for brand restoration available. Part of these costs can be picked up in a broad product recall policy as well.

Now that I have to be extra cautious eating apples I decided to google an alternative—french fries and vodka to see if they have had recalls or lawsuits alleging they were dangerous to your health (other than the obvious). And to my surprise, both french fries and vodka have had their share of law suits. So I guess the choice is ours.